Thread by @dunkhippo33

I wouldn't have invested in my own startup @launchbit at @HustleFundVC (but really appreciate all of my investors who did!)

This often shocks people but here's why >>

1) On the investor side, there are so many amazing startups. If I said yes to all whom I thought would do well, I would need 5x more $$.

So the bar is HIGH. There are a lot of exceptional ppl & you cannot say yes to everyone. This is what bums me out the most in being a VC.

2) So how do you whittle down who gets that "investment" check? For lack of a better phrase, you basically start nitpicking.

-valuation is too high!
-not enough differentiation / too competitive
-idea isn't unique

etc..

3) @launchbit would have been filtered out on "too competitive" / not enough differentiation for sure.

In addn, you start picking at the biz model. Is the perceived LTV high enough? retention high? CAC low enough?

As an investor, you don't know so you project what it might be

4) But obv there are tons of cos that do well in crowded spaces & there can be many winners.

With my entrep hat on, I know very well you don't need to do anything unique. Heck, often it's better NOT to do something unique, cuz you know there is demand. And just do that well.

5) This is where I didn't understand the disconnect between investors & entrep. Investors are looking for THE VERY HIGHEST ROI opp. NOT great businesses.

This was a mindblowing realization for me over the yrs.

They have $$ for 1 check, so who is the 1 check going to?

6) They are also often wrong because frankly speaking it's near impossible to tell at the early stages who is going to knock it out of the park -- I mean really knock it out of the park.

7) The other thing that is noticeable in this market is frenzy.

It's one thing to pick businesses that do well as businesses. But in markets like this one, it is advantageous for investors to pick companies that will get strong markups in the next fundraising rounds.

8) For example, if I invest today in a company at say $5m post money valuation, and in 6 months the co raises at $100m post-money valuation, even if they are only doing $300k in revenue per yr, that looks great for an investor!

9) And yet, I may have another company that is doing better as a business -- $1m ARR and profitable -- but raises at $13m post-money valuation.

Which is a better company to have?

From a biz perspective, obv the latter.

10) That being said, that's not aligned with investor incentives. If a company can be hyped up enough - even if the business is just doing ok - most investors would pick the higher returns, right?

11) This is where, esp in today's market, there's a huge disconnect. Your best winners are not necessarily your best companies! (nor necessarily the best founders...)

So going back to the picking, do you try to pick the cos you think will be hyped up or the best businesses?

12) Now some ppl may say, "well the hype is not real -- all the gains are on paper." That's true, but with secondary markets getting stronger, you can often cash out (if you want to) fairly early.

So the paper markups are actually real.

13) What is not known is how long these markets last.

In a market like 2001 or 2009, it was much better to hold the latter company -- $1m ARR and profitable.

No one can predict what a market will look like.

14) So what creates fundraising hype?

-running a good fundraising process -- i.e. mtg w/ lots of investors in a compacted time period
-being articulate / energetic / clear
-having a "good idea" (differentiated from other startups)

Lastly, resume & network affects this *a lot*.

15) @HustleFundVC, we have a wealth of portfolio cos. Founders who are well connected / Ivy league grads. Many others who are not. Some in SV. Many who are not.

And in this mkt which his driven up value faster & greater than "normal" it's astonishing the differences in markups.

16) Valuations were never about the "worth" of a company and its ability to execute but rather supply and investor demand dynamics. But in markets like these, the two go even LESS hand in hand.

And the ramifications are pretty great.

17) One q that may be on your mind now is how does this mkt affect overlooked founders - esp if resume and network play a role? (gender, race, geo, etc)

What does our own data show?

18) The good news is that seemingly race & geo matter a lot less. In fact, some of our greatest markups in 2020 @HustleFundVC came from our port cos run by Black male founders.

As far as geo is concerned, if you intro non-SV teams to SV investors, geo seems to be a non-issue.

19) The bad news is that literally 0 of our female founded companies (and we have 200+ portfolio companies) have gotten the same level of markup gains last year...

To be clear, this is not a critique but rather a commentary on the hype that is happening in the industry.

20) Moreover, I would also emphasize that we have a LOT of really STRONG female founders in our portfolio.

Again, it's disturbing to me just how disconnected valuation hype is from the reality of businesses in today's market.

So what happens next?

21) There are two possibilities:

Some companies who have received a lot of money but are run by ok operators will:

A) Fizzle out. Investors will lose their money.
OR
B) Survive and thrive because they have longer runway / more capital to make it work.

And as long as there are enough companies in bucket B, the ecosystem and hype continues.

I believe the startup ecosystem is mature enough where B is more likely to happen.

23) And lastly, if that's true, while I thought we were generally moving away from a world where you need to be super connected / have a particular resume, are we actually swinging the pendulum back in the other direction?

I don't have any great answers here.